R&D The Future For Life Sciences Equipment Firms

Long-term demographic trends are all pointing to the same things: larger and older populations. Currently in Japan, more than 25% of the total population is age 65 and older. Analysts expect nearly 40% of the nation's population to be in this group by 2050. In the United States, more than 70 million individuals will become Medicare beneficiaries over the next two decades. Similar stories abound across developed Europe and Asia. In the emerging world, exploding populations will require new healthcare solutions as well. Continued development across the healthcare sector is critical, and innovation remains the life blood of the biotech and pharmaceutical industry. It is in this innovation and advancement that investors can find long-term profit.

Higher R&D Equal Bigger SalesAccording to a study released in March by PhRMA and Burrill, overall biotech and pharma spending on R&D in 2010 increased by $1.5 billion, to a record-high $67.4 billion. Given the current sluggish economy, some analysts think that R&D spending will fall over the next few years. However, the long-term trend points towards higher research and development budgets. So far, the major pharmaceutical firms have not been successful in replenishing its pipelines and tired growing via biotech acquisitions. While this has worked in some instances, the truth is that internally derived drugs have a 20% higher chance of making it to market and smaller biotechs (big pharma's buyout targets) still need to spend major dollar amounts on R&D. (These analytical methods will help you size up a biotech company and make a winning investment. For more, see How To Do Qualitative Analysis On Biotech Companies.)

The life science equipment industry could be a great bet on the need for new healthcare solutions and offer some of the most attractive risk/reward opportunities in the sector. These "picks and shovels" providers of both high tech molecular diagnostic and sequencing equipment, along with basic lab needs, are the major recipients of all of this R&D spending. Sales of next-generation sequencing products have grown from just $50 million in 2006 to well over $520 million by 2009. Overall, life science companies saw a 14% increase in combined instrument sales in 2010, reaching nearly $25 billion.

In addition, the recent market downturn has many investors looking to reduce their risk profiles. The steady growth of life science equipment firms makes them an attractive alternative to higher-risk investments like RXi Pharmaceuticals (Nasdaq:RXII).

A Next-Gen PortfolioFor investors, the life sciences tools industry offers one of the better ways to play healthcare. While there is no dedicated ETF for the sector, the iShares Nasdaq Biotechnology (NYSE:IBB) does have some limited exposure to a few equipment firms like Qiagen (Nasdaq:QGEN). However, the best way to play the sector is through individual names. Here are a few picks. (For related reading on ETFs, see 5 ETF Flaws You Shouldn't Overlook.)

Starting off as company that made grocery scales in the early 1900s, Mettler-Toledo (NYSE:MTD) has transformed itself into the premier firm in precision instruments. Offering balances, pipettes and analytical equipment.The company recently reported a robust 23% in earnings during the second quarter versus the year ago period, and has seen an increase in insider buying activity. Also seeing heavy insider buying recently has been chromatography firm Waters (NYSE:WAT).

For investors wanting to focus on the largest firms in the sector, the trio of Agilent Technologies (NYSE:A), Life Technologies (Nasdaq:LIFE) and Thermo Fisher Scientific (NYSE:TMO) were the top three earners for 2010. Growing through internal R&D and acquisition, these three firms should continue to be on top for the remainder of 2011 into the future.

Finally as a side play on the growth of the life science's industry, REIT Alexandria (NYSE:ARE) owns and operates 159 different lab buildings across the United States and Canada. The stock currently yields 2.7% and could be a good way to add some income potential from the life sciences industry.

The Bottom LineFinding new healthcare solutions will be a paramount concern going forward. To that end, R&D spending by major pharmaceutical and biotech firms will see increases. For investors, the best way to profit from this increased spending is through the life science equipment makers. Firms like Affymetrix (Nasdaq:AFFX) make ideal portfolio solutions to play the end for innovation.(For related reading, see Using DCF In Biotech Valuation.)